Where to start
A coordinated intervention by the United States and Japan to support the yen, which drove a sharp weekly rally, has faced market skepticism, with many analysts arguing that the costly action is unlikely to reverse the currency's fundamental weakness at its root.
President Donald Trump confirmed during a Cabinet meeting that the US had participated in the intervention, calling it a "sign of friendship," according to a previous Reuters report. Japan's Ministry of Finance later confirmed on Monday that it had joined forces with the US Treasury, pushing the yen from a 40-year low of 164 per dollar to 156.8, marking a weekly gain of nearly 5%. The estimated scale of the intervention exceeded $50 billion.
However, market reaction has been less enthusiastic than anticipated. Even after this sharp rebound, the yen has merely returned to its May trading level, with its year-to-date gain against the dollar nearly zero. Compared to Japan's solo intervention in 2024, which drove the yen from 161 to 141, a 12% surge, this effort appears notably weaker.
Multiple foreign exchange strategists and economists have pinpointed the core issue: as long as the interest rate gap between the US and Japan remains unchanged, any intervention is merely a temporary fix without addressing the root cause.
Record Intervention Scale, but Doubtful Impact
This joint intervention is one of the largest coordinated actions ever undertaken by the US and Japan. A Reuters reporter spotted a to-do list on Treasury Secretary Scott Bessent's desk with only one item: "Buy yen 5 to 10 billion dollars." The New York Fed conducted the operation by selling euros to buy yen, according to sources cited by the Financial Times.
Notably, Japan's previous interventions typically involved selling down its roughly $1.1 trillion holdings of US Treasuries, but with 30-year US bond yields near 20-year highs, this path is unfavorable for the US bond market and also limits the scope for intervention. The action also had a side effect: the dollar index fell below 100 for the first time since June. Prior to this, both Bessent and Japan's Finance Minister Katsuyuki Suzuki had attempted verbal intervention to boost the yen, but both failed, ultimately prompting the escalation to actual action.
Massive Yield Gap Makes Intervention Unsustainable
Many market participants believe that intervention can only provide a temporary relief, not change the fundamental challenges facing the yen. Robin Brooks, a senior fellow at the Brookings Institution, wrote on social media: "The yen's decline is not due to speculators besieging Japan, but because Japanese government bond yields are far below where they should be."
Interest rate differentials are the core driver of exchange rate movements, with capital naturally flowing to higher-yielding markets. Japan's policy rate is currently just 1%, while the Federal Reserve's federal funds rate target range is 3.50% to 3.75%, creating a significant gap. Last Friday, the Bank of Japan chose to stand pat on interest rates at its policy meeting.
Chris Turner, an economist at ING, wrote in a report to clients that "firm policy discussions could create conditions for a 25-basis-point rate hike at the September 18 meeting," but he also highlighted a deeper contradiction: Japan's consumer price index is near 2%, while the policy rate is only half of the inflation rate.
Yen Deeply Undervalued Amid Structural Pressures
Louis Gave, CEO of Gavekal, echoed Turner's assessment in a client report on Monday. He believes that "a meaningful appreciation of the yen is unlikely unless the Federal Reserve cuts rates or the Bank of Japan begins to hike," and noted that the yen, like other Northeast Asian currencies, is "severely undervalued." This conclusion aligns with research from Deutsche Bank's July "World Map" report and the latest Economist Big Mac Index.
From a fundamental perspective, Japan has the largest current account surplus among the G7 nations, which should theoretically support its currency. However, the prevalence of the yen carry trade, where investors borrow low-yielding yen to buy higher-yielding assets, has persistently suppressed the yen's performance over the past 15 years, preventing the fundamental advantage from translating into currency support. Analysts generally believe that unless the Bank of Japan takes substantial steps in monetary policy, the effects of this joint intervention will be unsustainable, and the yen's structural weakness is unlikely to change significantly in the near term.
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